Liquidity Planning: Definition, Examples & Step-by-Step Guide
Liquidity planning is the forward-looking management of incoming and outgoing payments. This allows companies to ensure they remain solvent at all times. Existing capital should be used in the best possible way to ensure long-term stability.
What Does Liquidity Planning Mean?
Liquidity planning means systematically recording expected future incoming and outgoing payments. The data is analysed and managed accordingly.
The goal is to remain solvent at all times and identify financial bottlenecks early. Liquidity planning is the basis for short-term cash management. In the medium and long term, it supports financial decisions.
Importance for the Finance Department
For the finance department, liquidity planning is an essential component. Reliable cash flow forecasts contribute to sound budget decisions.
Good planning enables transparent payment flows and improves internal management. Treasury and the CFO use the insights for financing needs, investment planning and risk management.
Benefits of Optimised Liquidity Planning
Anyone who optimises their liquidity planning can ensure solvency at all times. Financing costs fall because bottlenecks can be identified early.
This allows the company to take countermeasures in time and avoid taking out expensive loans. In addition, liquidity buffers can be built up over a longer period. This allows surpluses to be invested strategically.
Risks of Inaccurate Planning
Anyone who carries out liquidity planning inaccurately exposes the company to unnecessary risks. Liquidity bottlenecks are identified too late and put operational processes at risk.
This can often lead to expensive emergency financing. It weakens the negotiating position with banks and suppliers. In the worst case, insolvency may threaten, even if the company could be profitable.
Who Creates Liquidity Planning?
Liquidity planning in companies involves several teams. The required data, decisions and approvals come from different departments.
Department heads. They report planned investments. If important projects or larger expenses are pending, they can forward this information immediately.
Accounting. It provides reliable actual data. It informs about incoming and outgoing payments and open items. Accounting supports historical analyses. It compares previous forecasts with the actual figures.
Treasurers. They can create the liquidity plan. To do this, the team uses previously collected data. The team analyses the figures, creates forecasts and derives operational measures.
CFO. The CFO carries strategic responsibility for liquidity, financing and risk management. She decides on measures in the event of bottlenecks or surpluses.
Management. The board and management are informed about liquidity risks and bottlenecks. In critical situations, these bodies define the direction.
What Belongs in a Liquidity Plan?
Anyone who wants to plan liquidity needs the right data. Most important is a transparent overview of all planned incoming and outgoing payments. This forms the basis for the upcoming planning. These payments can be divided into short-term, medium-term and, if applicable, long-term cash flows.
Relevant incoming payments include:
Incoming payments from customers.
Other operating income, such as licence fees or service fees.
Financing inflows, such as loans, credit lines or grants.
Incoming payments from investments or sales, such as fixed assets or shareholdings.
Relevant outgoing payments are:
Supplier invoices and operating costs.
Personnel costs, such as wages, salaries, bonuses and social security contributions.
Rent, leasing instalments and energy costs.
Investment expenditure.
Financing-related expenses, such as interest, repayments and fees.
What is not relevant?
Pure book values, for example, are not important for liquidity planning. They do not create a payment flow and therefore play no role in liquidity.
Balance sheet items that are not connected to real payments also play no role here. Payments far in the future are also irrelevant.
Since liquidity planning is usually focused on the short to medium term, suitable figures are needed. A typical period is 13 weeks. This period corresponds to one quarter and is expected as standard by many lenders.
Step-by-Step Guide: Creating Liquidity Planning
We now know what a liquidity plan is and what it includes. Now we answer the next essential question: How do you create a liquidity plan? There are five fundamental steps that are helpful during creation. Beginners can use this approach as guidance.
Step 1: Collect Data
Compiling the relevant starting data is essential. Open receivables and liabilities are taken into account here.
The finance department retrieves current account balances. Information on planned projects and investments is collected from department heads.
The top priority is that data is up to date, complete and correct. Since this is a challenging task, intelligent tools are available for support. They collect data in real time and centrally control projects and investments.
Step 2: Forecast Incoming and Outgoing Payments
Planned incoming payments are estimated from revenue and open items. Outgoing payments result from operating costs, suppliers, personnel and taxes.
Incoming and outgoing payments from financing must also be taken into account. Each transaction should be assigned precisely by week and day.
Step 3: Calculate Cash Flow Surplus or Deficit
What may sound complicated in theory is very simple in practice. Incoming payments minus outgoing payments are simply calculated per period.
This allows the expected cash balance on the reporting date to be calculated. Surpluses and bottlenecks are therefore clearly visible.
Step 4: Identify Liquidity Bottlenecks and Derive Measures
Careful preparation pays off. A transparent overview allows negative cash flows to be identified early.
Based on this, concrete measures can be derived. Modern software can even simulate scenarios. It estimates precisely what could happen in a worst or best case.
This helps the company prepare for future situations.
Step 5: Monitoring & Regular Updating
Anyone who has made it this far can now continuously compare the plan with actual data. Forecasts should be updated weekly or monthly to stay up to date.
As soon as deviations are discovered, measures can be adjusted.
What Is the Goal of Liquidity Planning?
Careful liquidity planning ensures solvency. The company therefore always has enough funds to meet payment obligations.
This reduces financial risks. Expensive emergency loans or overdrafts on credit lines are avoided.
Optimised Cash Management
Cash management is also optimised. Incoming and outgoing payments are managed over time. Surpluses are used efficiently and deficits are avoided.
In the long term, this improves capital tied up in working capital. If bottlenecks occur, they can be identified quickly. This gives the company the opportunity to initiate countermeasures early.
Better Planning Security
If decisions on investments and financing measures are pending, the plan provides a basis. This increases planning security for the CFO, treasury and management.
Liquidity is no longer a stress factor. It can be managed and controlled proactively.
How Is Liquidity Planning Connected to Financing?
Liquidity planning shows whether and when a company needs external capital. It forms the basis for financing decisions.
Should a loan be taken out? Does factoring make sense? How can an overdraft facility be avoided?
Timing and Integration
It determines when the optimal time is to take out or repay a loan. Financing affects future incoming and outgoing payments.
This plays a central role in integration into the plan. Good planning also avoids expensive emergency financing.
Negotiating With Banks
If financing is needed, the company presents its liquidity plan to banks and lenders. They assess the plan to evaluate reliability and solvency.
In most cases, a realistic 13-week forecast is expected here. Anyone who can present stable liquidity planning enjoys greater trust. This improves the rating and loan conditions.
Integration of Loans
As soon as a loan has been received in the company’s account, it is recorded as positive cash flow in the plan. Future interest payments and repayments are planned as outgoing payments.
Is it a loan with a variable interest rate? Then the forecast must be adjusted accordingly. Liquidity planning and loans therefore influence each other.
Example:
A mid-sized manufacturing company has created a liquidity plan. It shows that seasonal revenue creates a risk of liquidity gaps in spring. To avoid a negative cash balance of €150,000, a loan must be taken out.
Before the loan is granted:
What does a liquidity plan look like? Before the loan is granted, it shows a clear bottleneck. Measures such as paying suppliers later are not sufficient. The company contacts the bank with this plan. It serves as justification for the acute need for credit. During the meeting, the bank and company agree on a loan of €300,000. In return, the lender requires regular 13-week reports and interest.
After the loan is granted:
After the loan is granted, an incoming payment of €300,000 is recorded in the plan. From the seventh week onwards, interest is included as an outgoing payment. Liquid funds therefore remain positive and the bottleneck is solved. The CFO can now implement planned investments on schedule without liquidity risk.
Important Points in Credit Planning
To ensure reliable liquidity planning, there are a few things to consider:
Update interest rate changes regularly.
Do not fully use the credit line.
Deliver bank reports on time.
Check in the long term whether alternative financing would be cheaper.
Liquidity Planning Explained With an Example
The topic is complex. That is why we explain liquidity planning using a practical case.
Müller Example GmbH sells toys for children to retailers. Its current annual revenue is 5 million euros. Business flourishes especially during the Christmas period. This is when the team generates most of its revenue.
However, Müller Example GmbH faces a problem. Customers pay on average only 30 days later. The company’s suppliers require payment within 14 days. This leads to a liquidity gap every year. Customers pay late, while suppliers have already been paid.
Account balance at the beginning of the year: €50,000.
Expected incoming payments October to December: €300,000.
Expected outgoing payments October to December: €420,000.
From week 7, there is a risk of a negative cash balance of -€70,000.
The company faces several main risks. Suppliers can stop deliveries in the event of late payment. If wages are not paid on time, employees lose trust. If action is not taken in time, expensive emergency loans may be needed. The situation puts planned investments at risk.
The treasury department now creates a 13-week forecast. It describes the following situation:
Incoming Payments, Total 13 Weeks
Customer payments: €260,000
Other income: €40,000
Outgoing Payments, Total 13 Weeks
Suppliers: €200,000
Salaries: €150,000
Rent and fixed costs: €50,000
Taxes and other: €20,000
Result
Total incoming payments: €300,000
Total outgoing payments: €420,000
Liquidity deficit: -€120,000
The team identifies the critical phase in week 7. Here, the cash balance threatens to fall to -€70,000. No financing is currently in place. Objectives are derived from liquidity planning.
The company prepares for a bank meeting. Here, the need for credit is justified. This should increase planning security and minimise risks.
The goal? Instead of an emergency loan, a planned working capital loan should be taken out. Thanks to stable liquidity planning, the company was approved for a loan of €150,000.
Additional measures are also derived:
The payment terms with suppliers are renegotiated. Instead of 14 days, a payment period of 30 days should now apply.
Receivables management is also improved. Customers are now reminded faster if they do not pay their invoice on time.
A planned investment of €30,000 is initially postponed.
These measures show results after a short time. The liquidity balance remains positive. This enables more stable liquidity in the long term and less risk of bottlenecks.
From now on, the finance department works with a Treasury Management System. This allows them to retrieve all data in real time at any time.
The creation of forecasts is much faster and more precise. Monthly interest charges can be taken into account without difficulty.
Tools and Software for Liquidity Planning
Good liquidity planning takes a lot of time. It requires clear professional expertise. Anyone who makes a mistake can quickly put an entire company at risk.
Many companies do not want to take this risk. For this reason, they work with highly modern Treasury Management Systems.
They connect all of a company’s bank accounts. The software centralises all data clearly on one platform.
Account balances no longer have to be read manually. They are automated and bundled in one overview thanks to API connections. This significantly increases transparency.
Software also plays a central role in creating accurate, fast and reliable forecasts. They no longer have to be calculated using long Excel lists. Thanks to modern tools, this can be done in a system in just a few clicks.
Modern AI models help create realistic future scenarios. A company can use this to prepare for all possible developments.
This reduces risks because measures can be initiated early. The error rate also falls significantly. Tedious routine tasks in historically grown Excel lists are fully automated.
This saves time and errors.
All benefits of liquidity planning software compared with manual planning:
Automated data transfer from banks, ERP, accounting and payment systems.
Significantly lower error rate thanks to fewer manual entries.
Faster updating of liquidity planning.
Clear visualisations with dashboards, charts and scenarios.
Automatic forecasts that use historical data and patterns.
Real-time monitoring of critical developments and alerts for bottlenecks.
Scalability for growing companies.
Better collaboration between departments through a central platform.
But what must a good liquidity planning tool offer? It is important to mention that there is no one fits all. Every company has different requirements.
However, some functions are especially important. These include above all automated bank connectivity. This is the only way to deliver reliable real-time data.
You should also use a platform that integrates seamlessly into the current software landscape. Since many people work with it, an intuitive user interface is important. Everyone should be able to find relevant information quickly.
For company compliance, a role and permission system is important. This ensures that only authorised people can access confidential data. Other features that a good tool must offer are:
Automatic forecast function
Scenario analyses
Warning system
Multi-currency capability
Scalability
Audit-proof documentation
Liquidity Planning: Frequently Asked Questions
How Often Should Liquidity Planning Be Updated?
The frequency depends on the company’s size, industry and dynamics. In many industries, a weekly rhythm is considered standard. In very volatile business models, liquidity planning is even updated daily.
What Is the Difference Between Liquidity Calculation and Liquidity Planning?
Aspec | Liquidity planning | Liquidity calculation |
Definition | Forecast of future incoming and outgoing payments. | Analysis of payment flows that have already taken place. |
Time horizon | Future-oriented, from weeks to months.. | Analysis of payment flows that have already taken place. |
Purpose | Identify and manage bottlenecks early. | Assess actual cash flow development. |
Basis | Forecasts, open items, planned values. | Accounting, bank statements, actual data. |
Benefit | Basis for decisions on financing and management. | Control, analysis and assessment of deviations.. |
Is Liquidity Planning Mandatory?
Neither HGB nor IFRS explicitly require liquidity planning. Nevertheless, it is essential for companies of every size. It ensures solvency and financial stability.
Which Mistakes Should Be Avoided in Liquidity Planning?
Updating too rarely.
Incomplete or outdated data basis.
Lack of coordination with controlling and accounting.
No prioritisation of critical payments.
Overly optimistic or unrealistic forecasts.
What Are Best Practices for Successful Liquidity Planning?
Update planning regularly.
Create realistic, data-based forecasts.
Take scenarios, buffers and worst-case analyses into account.
Integrate all departments and use a suitable tool.
Continuously improve forecasts and compare them with actual data.
Optimise Your Liquidity Planning
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